Digital Equipment Corp

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DIGITAL EQUIPMENT CORP.

Digital Equipment Corp. was a leading developer of microprocessors, semiconductors, and other high-tech equipment in the 1970s and 1980s. Its breakthrough Alpha microprocessor, introduced in 1992, went on to power such well-known World Wide Web portals as Alta Vista and Lycos, although Lycos eventually switched to Microsoft's Wintel platform. Despite its technological breakthroughs, Digital struggled in the early 1990s to keep pace with competitors more adept at things like cutting costs and modifying sales strategies to take advantage of new industry trends. Eventually, the firm was taken over by Compaq Computer Corp. Digital's Alpha server line continues to serve many Unix-based systems.

EARLY HISTORY

Two engineers from the Massachusetts Institute of Technology (MIT), Kenneth Olsen and Harlan Anderson, joined forces in 1957 to establish Digital Equipment Corp. in Maynard, Massachusetts. The new computer technology firm launched a computer systems module the following year. In 1960, Olsen and Anderson developed the PDP-1 computer, the smallest and most interactive computer on the market at that time. They founded DECUS, the Digital Equipment Computer Users Society, in 1961. It became the world's largest computer society for a single manufacturer's products.

International expansion began in 1963, when offices were established in Munich, Germany, and Ottawa, Ontario. Digital then launched the PDP-5, the world's first minicomputer; and the PDP-1 operating system, which was the first system to make use of timesharing technology. In 1964, units opened in both Australia and the United Kingdom. The PDP-6, a 36-bit computer, shipped that year, and the world's first mass-produced minicomputer, the PDP-8, shipped in 1965. Olsen and Anderson took Digital public in 1966.

The late 1960s brought increased international growth. A manufacturing plant was established in Puerto Rico; a Japanese headquarters office opened in Tokyo; and a European headquarters office opened in Switzerland. In 1970, a new plant in Massachusetts began manufacturing peripheral and metal products. Product launches during the first half of the decade included the PDP-11/20, a 16-bit computer; MPS, the firm's first microprocessor; and the LSI-11, the firm's first 16-bit microcomputer. By 1975, Digital had sold more than 50,000 computer systems. The firm unveiled the DECSYSTEM-20, a 36-bit timesharing system, in 1976. The following year, Digital developed its first VAX computer, the VAX-11/780. Sales exceeded $1 billion for the first time in 1977, and employees totaled 36,000.

Digital made its first foray into retail sales in 1978 by establishing a store in New Hampshire. Computer systems sold reached the 100,000 mark. Two years later the firm launched its second VAX system, the VAX-11/750, which was the world's first Large Scale Integration (LSI) 32-bit minicomputer. Intel Corp. and Xerox Corp. began working with Digital on developing a local network, known as Ethernet. Sales exceeded $3 billion. The firm diversified into personal computers by launching DECmate II, Rainbow 100, Professional 325, and Professional 350 in 1982. International growth continued via a joint venture agreement between Brazil's Elebra Computadores and Digital. In 1984, Digital bought Trilogy Technology Corp. Late in the decade, the firm began forging strategic alliances with other industry leaders. As a result, Cray Research Inc., the world's top supercomputer maker, agreed to develop products compatible with Digital products, as did Apple Computer Inc. More than 50 percent of total annual sales came from international operations.

The firm expanded into Eastern Europe in 1990, with the establishment of Digital (Hungary) Ltd., in Budapest. That year, more than 20 new computers, peripherals, and software applications were introduced. Digital added to its holdings the financial services arm of London-based Data Logic Ltd., a leading manufacturer of UNIX-based software for brokerage houses. In 1991, Asea Brown Boveri Inc. (ABB) and Digital forged a joint venture known as EA Information Systems Inc. The venture focused on furthering the three-dimensional plant design work started in ABB's engineering automation software division. Microsoft Corp. agreed to use Digital's new PATH-WORKS software to allow Microsoft Windows users to retrieve and trade data on local area networks. Similarly, Intel Corp. and Digital agreed to work together on several software projects in 1992. Acquisitions included the information systems unit of Philips Electronics, BASYS Automation Systems, and leading PC software and accessories distributor 800-SOFTWARE. That year, Digital launched its RISC-based Alpha chip, the fastest such chip in the industry. Both Microsoft and Olivetti agreed to work with Digital to develop a platform to best utilize the new microprocessor.

ATTEMPT AT RESTRUCTURING

Despite the firm's cutting-edge technology, Digital found itself losing ground to competitors like Sun Microsystems and Silicon Graphics. According to an April 1997 article in Marketing Computers, "Digital couldn't compete in the cost-controlled, channel dependent environment of the 1990s with its archaic sale structure." After four consecutive years of losses, the firm announced a reorganization in 1994. Digital's workforce was slashed 21 percent the following year, and net income rebounded to $122 million as direct sales tactics were replaced with reselling agreements. In 1996, Digital, Microsoft Corp., and MCI Communications Corp. began working together to develop e-mail, groupware business communications, and other services to manage the corporate data networks known as intranets.

Intel Corp. agreed to pay $700 million for the semiconductor manufacturing operations of Digital in 1997. Per the terms of the deal, Digital retained intellectual property rights to the Alpha chip, as well as the right to continue developing it. According to Digital Chairman Robert Palmer, as quoted in a November 1997 issue of InfoWorld, the divestiture allowed Digital to "refocus on its core mission of building Internet business solutions based on high-performance platforms and services." To this end, the firm continued refining its Alpha chip, and in 1998 released the 21264 Alpha, the first microprocessor to operate at a speed faster than one gigahertz. Digital also sold its network products operations to Cabletron Systems Inc. for roughly $430 million.

TAKEOVER BY COMPAQ COMPUTER CORP.

Although Compaq had first considered buying Digital in 1995, it wasn't until three years later that the personal computer manufacturer and marketer made an offer. Some analysts believed it was Digital's 1997 decision to refocus on Internet technology and services, after making two major divestitures, that caught Compaq's eye in 1998. Others attributed Compaq's renewed interest to the extensive service division Digital had amassed over the years while developing new technology for corporate buyers. Digital's wide range of products and servicesincluding its Alpha architecture, Digital Unix operating system, and 23,000 service employeeswould allow Compaq to compete with the likes of IBM Corp.

In June 1998, Compaq finally acquired Digital, completing the largest merger to date in the computer industry. Compaq discontinued Digital's personal computer line and sought to move beyond making and selling personal computers by offering increased computer services to clients. By 2001, service made up more than 20 percent of Compaq's total revenues. In large part, this was due to the 23,000 service employees the firm had inherited from Digital. That year, Compaq announced its intent to stop making the Alpha chip in favor of Intel's Itanium chip, and the intellectual property rights of Alpha were transferred to Intel.

FURTHER READING:

Barker, Robert. "Missed the Boat on DEC? So Did FidelityBig Time." BusinessWeek Online. February 6, 1998. Available from www.businessweekonline.com.

Bilodeau, Anne. "Digital is Weaned from Direct Sales, and Finds it Likes the Freedom." Marketing Computers. April 1997.

Emigh, Jacqueline. "Digital Crashes 1 Gigahertz Speed Barrier." Computing Canada. February 23, 1998.

Pendery, David. "Internet Business Key to Digital's Future." InfoWorld. November 10, 1997.

Popovich, Ken. "Compaq Turns on New Services Initiative." eWeek. July 16, 2001.

Ristelhueber, Robert. "A Slimmer, More Attractive Digital." Electronic Business. February 1998.

Sykes, Rebecca. "Digital Makes Peace with Intel." InfoWorld. November 3, 1997.

Williams, Molly, and Gary McWilliams. "Compaq Will Switch to Intel Processors." The Wall Street Journal. June 26, 2001.

SEE ALSO: Compaq Computer Corp.; Hardware; IBM Inc.; Intel Corp.; Microprocessor; Microsoft Corp.; SunMicrosystems; UNIX